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Adaptive consumption behavior

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  • Howitt, Peter
  • Özak, Ömer

Abstract

In this paper we propose and study a theory of adaptive consumption behavior under income uncertainty and liquidity constraints. We assume that consumption is governed by a linear function of wealth, whose coefficients are revised each period by a procedure that places few informational or computational demands on the consumer. We show that under a variety of settings the procedure converges quickly to a set of coefficients with low welfare cost relative to a fully optimal nonlinear consumption function.

Suggested Citation

  • Howitt, Peter & Özak, Ömer, 2014. "Adaptive consumption behavior," Journal of Economic Dynamics and Control, Elsevier, vol. 39(C), pages 37-61.
  • Handle: RePEc:eee:dyncon:v:39:y:2014:i:c:p:37-61
    DOI: 10.1016/j.jedc.2013.11.003
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    References listed on IDEAS

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    Cited by:

    1. Kiichi Tokuoka, 2015. "Do Consumers Learn from Their Own Experiences?," The Japanese Economic Review, Japanese Economic Association, vol. 66(4), pages 466-491, December.

    More about this item

    Keywords

    Learning; Consumption function; Liquidity constraint; Dynamic programming;

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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